Interest levels in cryptocurrencies are high, but not many investors have a risk appetite. Experts suggest a small portfolio allocation in cryptos, preferably as an SIP.
Bitcoin has seen a meteoric rise in value in the past one year. (Image: Pexels.com/David McBee)
With some cryptocurrencies like Bitcoin and Ethereum giving investors huge returns in the past few months, beating all other forms of investment in assets, retail investors are now dipping their toes into the water. The trouble is, not many understand what it means to invest in cryptocurrencies.
A recent poll on Financial Express Online showed that 40.6 percent of investors think cryptocurrencies are too risky to invest in, while another 37 percent said they don’t understand the market. About 15 percent said they would get in for quick gains.
Gaurav Dahake, CEO of cryptocurrency exchange Bitbns, says a lot of people signed up during the first big bull run of Bitcoin in 2017 and 2018, but nearly 90 percent dropped out. However, after the Supreme Court in March reversed an RBI circular that prevented financial institutions and banks from dealing in crypto, many investors are flocking back.
Bitbns, which claims a daily trading volume of close to $50 million, has over 75 different cryptocurrency pairs and in which one can invest in fiat currency including Indian rupees.
Says Dahake: “What was the overall trading volume in one month before March 2020 is now happening in just one day. The interest levels are spiking in Bitcoin, but it will taper soon.”
Dahake is quick to advise caution while investing in cryptocurrencies. “For most people an SIP (systematic investment plan) kind of investing makes sense. In the past, people invested at different price points in a lump sum, and they got burned badly when Bitcoin fell.”
Other investors who tried looking at ICOs (initial coin offerings – similar to an IPO) of other cryptos also lost money as nearly 95 percent of ICOs which were a rage in 2017 didn’t materialize, according to Dahake.
Still, it’s an investment option that beats mutual funds, bank fixed deposits, or even Sensex and Nifty returns over a three-year horizon, especially if one takes the SIP route. There are several cryptocurrency exchanges in India such as WazirX, CoinDCX, Zebpay, BuyUcoin, and UnoCoin among others.
The more the exchanges the more users they bring to the market. But with only 900 odd Bitcoins being mined daily demand is increasing, and hence the price. Bitcoin supply is capped at 21 million of which about 18.5 million has already been mined and a significant amount is lost forever, stuck in crypto wallets with missing keys.
The large fluctuations happen now because of institutions investing in Bitcoin. Kshitij Purohit, lead currency and commodities at Capitalvia Global Research, says “Many multinational players have got into the market and investing some of their clients’ money. Hedge funds are also hedging their portfolios against inflation in Bitcoin. Previously, they used to hedge against inflation by investing in gold.”
Purohit says funds are selling bullion and buying cryptocurrency, which is what makes the future quite bullish. Bitcoin may consolidate between $30,000 to $35,000 in the short term for a month but will gain after that. By Diwali 2021, Purohit expects about 150 percent return in Bitcoin.
So how much of a person’s portfolio should be invested in cryptocurrency?
Shivam Thakral, CEO, BuyUcoin, another cryptocurrency exchange says: “Don’t look at quick gains, although you will have short term gains. Stay invested for the medium to long term. If you look at the three-year performance of crypto, you won’t be at a loss.”
Thakral says one has to look at the fundamentals of cryptocurrency. He gives the example of ethereum, the second most sought-after cryptocurrency after Bitcoin. It works on the back of a decentralized blockchain computing network. Each time someone builds on that network, more “ether” is used, making it fairly tangible.
“Actually, learning about crypto is not easy. In general, markets tend to value things based on perception. Even with equity, while it is tangible, but sometimes you cannot justify valuations. Look at what’s happening with Tesla,” says Dahake.
Purohit advises filling about 25 to 30 percent of one’s portfolio with cryptocurrency investments for good returns. He says one should put another 10 to 15 percent in precious metals, especially silver, because there is strong industrial demand. He also says to put about 30 to 35 percent in equities and about 15 percent in debt funds.
Dahake says that anyone who wants to get into crypto investing should start with Bitcoin, even though it is very expensive. His reasoning: “You don’t buy copper because gold is expensive. Think of Bitcoin like the Reliance Industries stock in the Indian stock market. Others are like penny stocks with respect to Bitcoin. Start with Bitcoin, but don’t invest more than 5-6 percent of your wealth in it.”
Thakral says a lot of risk appetite will come from Indian financial institutions in a few months from now. “They want a piece of the pie. There is still regulatory uncertainty in India, but regulations are coming. They don’t want to be behind their global counterparts.”
That’s when the market will get swamped with investors. Dahake cites an example of where Bitcoin stands right now in terms of potential: “Think of an app like WhatsApp. If just one person has it, it’s of no value. If 100 people have it, it’s of some value, but when a billion people have access to it it’s invaluable. Bitcoin is at that 100 people stage now. Demand will rise.” (And supply is limited.)
All three are of the opinion that Bitcoin would cross $100,000 per BTC by 2022. “By the end of this year, people will be treating it like gold,” says Thakral.